CHICAGO, Sep 10, 2008 (BUSINESS WIRE) --
Boards of directors feeling wary of granting large CEO compensation
packages that could anger shareholders should craft them so they
simultaneously align CEO performance measurement and its rewards with
company financial performance, according to an article in the current
issue of People & Strategy, a journal of The Human Resource
Planning Society.

In "Beyond the Boardroom: Considering CEO Pay
in a Broader Context," co-authors Steven Van
Putten and Aubrey Bout reveal the damage inflicted on a company when a
board grants excessive senior leader pay. In addition, they contend many
earlier controversies could have been quelled through better
pay-for-performance alignment. Boards can help themselves by ensuring
total CEO pay and the manner in which packages are structured satisfy
internal groups such as shareholders and employees. These packages must
also meet the needs of external stakeholders such as potential CEO
succession candidates and the larger community.

Van Putten and Bout review reform efforts underway involving CEO pay,
spurred by the perception that the senior leader is paid too much and
compensation and perks are delivered irrespective of performance. The
authors cite a 2008 Watson Wyatt report showing 86 percent of
institutional investors believing pay models at most U.S. companies lead
to excessive executive pay levels. More than three-quarters (78 percent)
say that excessive CEO pay creates employee resentment.

The authors recommend shareholders be convinced a pay package aligns
with their interests; attracts and retains high caliber talent;
motivates the CEO to achieve performance objectives; and withstands
public scrutiny.

Employees often view their CEO's pay as
something that sets the tone for the culture the organization is trying
to create. Pay packages should be structured around core incentives
already cascading down into the organization and send a message of "pay
for performance."

Among CEO succession candidates, Van Putten and Bout say high achievers
always scan for signals coming from a hiring company. Such candidates
admire companies in which the CEO enjoys significant, performance-based
incentives including a management stock purchase plan. In it, the
executive can purchase company stock on a pretax basis through a
deferral of earned incentive. In exchange for forgoing a portion of a
bonus, purchased stock is matched with additional shares.

Industry competitiveness also can motivate companies to view CEO pay
plans as means to differentiate themselves from rivals. In some, the
authors say compensation committees now look beyond competitive
benchmarking as a yardstick. They cite another 2008 Watson Wyatt report
showing firms with high CEO stock ownership often experience better
earnings performance.

Aligning pay -- including the CEO's
-- throughout a pay-for-performance-oriented
culture unifies and motivates employees. To help ensure
organization-wide pay alignment, the authors say:

--
As many employees as possible should be part of an organization-wide,
pay-for-performance model; merit increases should allow for
significant differentiation between employee and company performance.

--
The organization's bonus plan generally
should use similar metrics for both employees and the CEO; the funding
percentages should be somewhat alike.

--
Stock incentive plans should stem from board-level decisions over who
is eligible, but participation should be limited to top performers.

--
Limits should be placed on special awards and perquisites not linked
to performance.

The authors say boards must measure total CEO "realizable
pay" in factoring overall pay. Total
realizable pay represents the total actual cash compensation plus the
current value of outstanding stock-related awards. They feel the best
way to measure success of the CEO pay program is analyzing company
performance and executive pay simultaneously. Boards must ask how well
the company performed relative to its peers regarding stock price and
core financial metrics, and then relate these comparisons to how much
total realizable CEO pay was earned.

In the article, available online at https:// www.hrps.org,
Van Putten and Bout conclude that a CEO compensation program is
successful whenever the chief executive's
realizable pay properly aligns with company performance.

About The Human Resource Planning Society

The Human Resource Planning Society (HRPS) is a not-for-profit
organization which has been the premier global association and network
of senior human resources executives and thought leaders for over 25
years. The more than 3,000 members of HRPS represent firms of $500
million or more in annual sales, with the balance of the membership
representing smaller firms, partners and senior consultants from global
HR consulting firms and leading university faculty and researchers. HRPS
members are committed to improving organizational performance by
creating a global network of individuals to function as business
partners in applying strategic human resource management practices. It
offers a broad range of professional development programs with
distinguished human resource scholars, practitioners and business
leaders. HRPS' People & Strategy quarterly
journal contains current theory, research and practice in strategic
human resource management.

SOURCE: The Human Resource Planning Society

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